4 Principles of Investing Every Novice Investor Should Follow

When it comes to investing or dealing with money in general, many people either sweat through their clothes in fear or can’t shut up because they think they know everything. Money is the one topic that affects everyone. We can’t live without it. In fact, it practically defines us since how much we make, what kind of car we drive, the house we live in, or the size of our bank account determines our worth. The last one will be the focus of this, and many blog posts to follow, as we will help you build your portfolio.

Before we get started, remember this important tip: Don’t talk finances with anyone other than your significant other or immediate family. Nothing good will come of it. That being said, why invest in the first place? So you can stop working at some point in your life. It doesn’t get any simpler than that. However, in order to do that, you’ll need to replace your income. You still need money to live. Gone are the days of relying on Social Security on the traditional company pension plan.

Investing is as much art (theory) as it is science (fundamental analysis using mathematics). Numbers, like EPS, P/E ratios, cash flow, and sales are important. However, how to apply them and dissect the rationale behind them is equally important. Most will find this difficult and can’t, and shouldn’t, try to do on their own. Here are four things you can do:

1. Pay Yourself First: Most of us do the opposite. We pay our bills, support our lifestyles, and save what’s left, if anything. Instead, automatically save 10% of your income (including company matches) before you ever see your paycheck. Something will always come up if you don’t, and you’ll never have a nest egg large enough to support your retirement. Start today. Don’t wait. Take full advantage of the time value of money, which is the one of the best things going for you.

2. Never Lose Money: Warren Buffett famously said this is his #1 rule in investing. He only has one other, which is never forget rule #1. While it’s important to protect your capital, it’s unrealistic to accumulate a large enough nest egg without assuming some risk. Plus, you’ll have to beat inflation as well. By creating a risk profile, you can analyze risk/reward tradeoffs for any investment. It’s also important to note investing is not a get rich quick scheme or gambling. It’s the act of committing capital with the expectation of earning a profit by taking all information available (good & bad) and trying to predict (rational & irrational) future outcomes.

3. Price is What You Pay, Value is What You Get: Another of Warren’s famous quotes (hey, it’s never bad to follow perhaps the greatest investor of all-time, is it?). There is a big difference between the two. Would you pay $50,000 for a car that is worth only $2,000? Of course not. Value and price aren’t quite as easy to distinguish with investments. Make sure you do your homework before making an investment. For most of us, investing in low cost ETF’s and index funds is sufficient. They may not be sexy, but we’re looking for results, not aesthetics. It’s difficult to continuously outperform the market, in addition to paying all of those fees.

4. Make Money Work for You: This means making investments that generate cash flow streams. In order to be financially independent, your money must be working 24 hours a day, 7 days a week. Basically, you have to be making money while you’re sleeping. The aforementioned ETF/Index funds will accomplish this. The goal is to build a passive income stream of dividends and interest with timely sales for capital gains. To help your portfolio grow exponentially, reinvest the earnings to compound growth.

Ride your winners long, and cut your losers short. Diversify asset classes, not individual holdings. You can never eliminate systematic (market) risk, but you can build a million dollar portfolio that will provide for your financial needs during your golden years.

See you next time!